Navigant Research Blog

U.K. and U.S. Energy Policies Poles Apart

— February 28, 2012

Beverly Simpson, the new consul general at the British Consulate in Denver, hosted a lunch in downtown Denver today featuring special guests Vice Admiral (ret.) Dennis McGinn, now the president of the American Council on Renewable Energy (ACORE); and Rear Admiral Neil Morisetti, the climate and energy security envoy for the United Kingdom.  I had a particular interest in hearing the naval officers speak since Pike Research has published a few reports, including last year’s Renewable Energy for Military Applications, on cleantech and the military.

The admirals’ comments were a strong indicator that the military has moved far beyond civilian elected officials, at least in the United States, in thinking about the future of energy security and innovation.  Morisetti called climate change a “threat multiplier” that will fuel conflicts and promote instability in many parts of the world, particularly Africa and the Middle East.  And he joined McGinn in lamenting the absence of a coherent and forward-looking energy policy in the United States.  “My faith in the U.S. system, quite frankly, had taken a hit over the last two years as I’ve been traveling around with Admiral McGinn,” said Morisetti.  “I had always known the United States as a place where, when there’s a problem, the intellectual and financial resources were harnessed and the problem was taken on directly.  I haven’t seen that in regards to energy security.” (Morisetti did mention that, in the last 36 hours of his visit to Colorado, “my faith has been restored.”)

Interestingly, much of the conversation over lunch centered not on renewables but on natural gas – specifically, the implications of the surge in domestic natural gas supplies that has brought the price down to below $5 per million BTU and is pricing many wind and solar generation projects out of the market.  McGinn, for one, was sanguine about the long-term prospects for renewables competing with natural gas plants.

“We’ve been down this road before, of falling in love with a single energy source,” the former vice admiral said.  “I think there’s a natural synergy between renewables, particularly wind and solar, and using low-cost natural gas generation for firming.” McGinn added that given the environmental challenges the natural gas industry is facing, particularly around fracking, he doesn’t expect the price to stay this low forever.

The other theme of the gathering was the sharp differences between the United Kingdom and the United States around the challenges of climate change and energy security.  “We have a broad political consensus” around the need to face up to climate change and devise sensible and effective policies to limit it, Morisetti said – something that cannot be said about the U.S.  “I’m always amused when I hear a BMW dealer in the U.S. talking about his models that get 25 miles to the gallon.  If you go to Germany, you’ll hear them talking about 70 to 80 kilometers [42 to 48 miles] to the gallon.  And it’s the same company.”

“If I were king of the world for a day,” McGinn stated, “I’d do two things:  Eliminate all subsidies, for fossil fuels, renewables, everything.  And institute a carbon tax that would enable a smooth transition to sustainable sources of energy.”

Strong talk from a former naval officer.  Let’s hope someone in Washington, where ACORE is based, starts listening.

 

Has the Time Come for Prepaid Electrical Service?

— February 28, 2012

Everyone is familiar with prepayment, especially when it comes to prepaid wireless phone services.  But, in the United States, the concept of prepayment for electric services is not yet well understood. By contrast, electric prepayment is a common practice in many other nations, especially in the United Kingdom, Ireland, South Africa, and many parts of Asia Pacific.  In South Africa, for example, over 50% of the residents use electric prepaid programs that are offered by its major utility, Eskom, the largest producer of electricity in Africa and among the top seven utilities in the world in terms of generation capacity.  With the oldest prepaid program in Europe, the United Kingdom has approximately 14-15% of all households on an electric prepaid plan – usage of which, according to Ofgem, increased by 5% in 2010.  Recognizing that these types of services represent an essential part of the electric metering market, the U.K. authorities have mandated that the nation-wide roll-out of smart meters will include a prepayment functionality. 

In the United States. some observers estimate that less than 10% of the 3,200 utilities in the country offer prepaid electric services.  Texas, Arizona, Oklahoma, Vermont, State of Washington and a few states in the Southeast have been frontrunners, especially among cooperatives and municipalities. The large independently-owned utilities (IOUs) have, on the other hand, been reluctant to adopt prepaid plans – in part because they are more constrained than the other utilities to comply with state utility commission rulings.  As a result, the overwhelming majority of prepaid programs in the country are run by smaller utilities, frequently serving rural and low-income communities with many transients like college or university students. 

The oldest and best known prepaid program is the Salt River Project (SRP) in Phoenix, Arizona, which initiated its prepaid program – the M-Power Program – in 1993.  In 2011, its program enrollment rose by 16% to a total of 125,000 participants. This is an especially remarkable achievement because SRP does not advertise its prepaid services.  Oklahoma Electric Cooperative (OEC) offers another, albeit younger, example of a prepaid program with somewhat more than 10% of its total customer base currently enrolled as prepaid participants, i.e. about 5,122 customers. Every resident is eligible to become a participant in this program, though it is most popular among its student population.

Barriers to electric prepaid services have primarily stemmed from objections from consumer advocacy groups, public utility commissions (PUCs) and regulatory agencies.  One fear has been the possibility of utilities shutting off power to certain “disadvantaged” customers.  In November 2011, the Iowa Gazette ran an article pointing to the threat of electrical disconnections from prepaid programs for vulnerable residents, such as the elderly, individuals with disabilities or life-threatening medical conditions.  Another objection has been that prepaid programs might encourage low-income customers to disconnect electric service in order to keep money available for other necessities like food and clothing.  In some instances, PUCs have accused utilities of targeting low-income consumers for prepaid programs, fearing that they are stigmatizing these consumers.  Some time ago, these concerns may have had some validity, but they have begun to make less sense today as prepayment is increasingly becoming the preferred payment method among consumers in a wide variety of situations, especially among mobile phone users. 

In addition, there is growing evidence that the benefits of electric prepaid programs far outweigh any of these concerns.  Customer surveys have consistently shown high customer satisfaction – around 80-90% of prepay customers are happy or very happy and would recommend the program to others.  Prepay consumers tend to feel that they are in control of their electricity bill and can better manage their budget by being able to choose when, how, and what they pay each month for their electricity. As one prepaid customer put it:  “It is easier to pay $25 every week than $100 at the end of every month.”  Because prepaid programs encourage consumers to pay attention to their use of electricity, many utilities, such as SRP and OEC, have been able to demonstrate improved energy efficiency behavior among their prepay customers.

Utilities also benefit from prepaid programs, through better revenue protection and cash flow.  With a traditional post-pay system, some consumers may owe hundreds or even thousands of dollars before they are disconnected, whereas with prepayment, a much smaller amount of less than $50 is owed before they are disconnected.  For example, at Brunswick Electric Municipal Corporation, reduction in write-offs has averaged between $1,000 and $2,000 per month. Moreover, in a prepaid system utilities can achieve significant administrative cost savings by not having to support resources to track and collect deposits for initiating electricity for customers, to send monthly bills and to collect reconnection fees from consumers that have been disconnected.  In many cases, electric prepaid services are a win-win. 

The growing realization of the value proposition of such services, together with the increasing deployment of advanced smart meters that will greatly facilitate prepaid programs, has become a powerful incentive for U.S. utilities to seriously consider adoption of such plans.  And unlike programs in the past, which frequently targeted low-income residents, the prevalent goal today is to make these programs available to every utility customer.  As better customer choice becomes a key strategic focus among utilities, electric prepaid services will eventually become the new norm – even in the United States. 

 

E-Trains and Energy Storage

— February 28, 2012

One of the most promising aspects of energy storage is that it’s used to make an existing system more efficient.  If you think of the grid as the system, then energy storage can help make generation, transmission, distribution, and even customer energy use more efficient.

How many different systems are there? The grid is the most obvious example.  Microgrids are another type of system.  A more relevant system to the average consumer is a transportation system.  And there are several examples of companies in the energy storage space targeting transportation systems. 

How does it work? An energy storage system (specifically, a battery) is paired with an electricity-powered train system; the battery captures the energy from regenerative braking, just as the battery in a hybrid-electric vehicle does (which is part of the reason why these vehicles have high gas mileage).  In the case of transportation systems, the battery is situated not on the train itself, but at a station the train travels through.

Hitachi is supplying two 1 megawatt lithium ion battery systems to the Seoul Metro in Korea, after successfully trialing what the company calls the B-CHOP system in a train station in Kobe, Japan.  In this case, the batteries will collect energy from passing (and braking) trains and use that energy to run other electric trains on the system.  The goal is to reduce the overall energy consumption of the electric trains passing through the station.

NGK Insulators has also installed several sodium sulfur battery systems at rail stations in Japan, although it is not clear whether these systems are being used to capture energy from the braking trains themselves, or to manage how much the stations and trains are taxing the grid.  A subtle difference in applications, but an important one. 

SEPTA (Philadelphia) is trialing a battery from SAFT at a busy rail station and is using it to store and release energy. The transport agency is also partnering with Viridity Energy (also based in Philadelphia) to participate in demand response programs and the and frequency regulation market.  Thankfully for SEPTA, PJM Interconnection – the independent system operator for the region – is one of the most progressive system operators in the country and allows even relatively small assets (like a modestly sized battery) to participate in the frequency regulation market.  Programs like these could make railways and urban transit systems even more efficient ways of transporting large numbers of people.

 

Political Theater and the Car Market

— February 28, 2012

Since 2008, the world of automotive manufacturing has collided in a more direct way with United States politics than arguably at any other point in history.  Faced with collapsing markets, General Motors and Chrysler gave in to the need for public support.  This combined with a political swing to the right in the 2010 mid-term elections has set the stage for political backlash for the big automakers and for new startup companies that took advantage of government loans and grants.  Even companies who don’t make headlines, like Ford and Nissan, are not immune to the politics as they are recipients of Advanced Technologies Vehicle Manufacturing (ATVM) loans.

This political backlash was never more on display than it was when GM and the National Highway Traffic Safety Administration were called into a congressional hearing over the Volt battery fires.  Subcommittee hearings, regardless of party lead, are often just a platform for grandstanding and political theater, and this one was no exception.  Listening to the hearing it became clear that Chairman Jim Jordan had little patience for NHTSA when an opportunity to criticize President Obama’s push towards clean energy presented itself.  For his part, GM CEO Daniel Akerson scored a high entertainment-value quote of his own when he said the now oft-repeated statement: “We did not develop the Chevy Volt to be a political punching bag. We engineered the Volt to be a technological wonder….”

In his opening remarks, Representative Dennis Kucinich all but declared the hearing pointless when he stated that, “a very detailed 135 page final report by [NHTSA] on its investigation into the Volt battery fire, which was made public on Friday, provides detailed answers to the question that this hearing seems to ask.”  The title of the hearing was “What did NHTSA know about the Volt vehicle fires & when did they know it?”  Perhaps the most perplexing statement from the whole hearing came from Representative Mike Kelly, the owner of a Chevrolet car dealership, who showed an improbable lack of knowledge about automobile development: “This is a halo car, not so much for General Motors but for this administration.  Taxpayer dollars are used to subsidize a product.  If General Motors thought this was a good investment, they would have launched it themselves.”  Thus implying that somehow, between 2009 and the fall of 2010, the Obama administration compelled GM to develop the Volt.

If you missed this piece of theater, don’t worry, this being an election year, there is plenty more to come.  A new transportation and energy bill passed out of a House committee in early February, but was subsequently broken up into parts.  The massive bill has many policies aimed at reducing gas and diesel prices and cutting spending on transportation, including reducing gasoline taxes, increasing truck weight limits, expanding offshore oil and gas drilling, approving the Keystone XL pipeline, and opening some leases in the Arctic National Wildlife Refuge in Alaska to oil drilling, as well as eliminating mass transit subsidies and removing funding for Safe Routes to Schools and Transportation Enhancement grants (where most pedestrian and bicycling infrastructure comes from).  There are also Republican-introduced bills that would eliminate any electric vehicle incentives (H.R. 3768 from Rep. Kelly) and would create a $1 billion (yes, with a “B”) cash prize for the automaker that sells 60,000 100mpg cars (H.R. 3872).  Meanwhile, a bipartisan Senate transportation bill is now being held hostage in a procedural move by Senator Rand Paul to secure a vote on ending foreign aid to Egypt.  Meanwhile, high-end EV maker Fisker Automotive is working to renegotiate loans with the DOE.  Like just about every other PEV automaker, Fisker has missed its target dates for launching a new model (the Karma), but in Fisker’s case these missed dates have put much of the DOE financing for its next model, the Nina, in jeopardy.  In the wake of the DOE reneging on Severstal’s $730 million loan for constructing an advanced lightweight steel plant in the U.S., it’s safe to assume that the negotiation seems destined to become mired in politics.  

Unfortunately, PEVs and ATVM loans seem inevitably destined to become political footballs.  And the theatrics of the process can have an impact on the attitude towards PEVs and contribute to mainstream buyers’ wariness toward them.

 

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